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The role of directors on offshore hedge funds has often been, at best, a limited oversight role, with perfunctory annual meetings and limited interchange with the fund itself during the year.* This has been changing -- slowly--- as compliance moves to the top of the list of concerns for investors and managers alike. In addition, directors themselves are realizing that the status quo is no longer tenable.

Recent litigation has ensared directors, pushing them into playing a more active role. For example, in a recent Cayman Islands Grand Court decision in the Weavering fund fraud case**, two "independent" directors were ordered to pay $111 million for willful neglect and failing to carry out their duties. Even those these two directors may not have even been "independent" in a technical sense, the judgement was based on the fact that they "did nothing and carried on doing nothing for almost six years", as the justice in the case noted.

What should managers and investors be looking for in a board of directors? Here are some areas to focus on:

-Is the board receiving relevant information on a timely basis? That is, do they have the information that they will need to perform their oversight role?

-Are the board meetings substantive, with a full agenda and detailed minutes? This indicates a board that is engaged, as opposed to playing a perfunctory role.

-Is the director a person or a company? While this type of set-up is becoming less common, it is still found occassionally and can be a red flag for a disengaged board.

-Is the board viewed as an integral part of a fund's operations? Is the board utilized as a resource, and do the directors have the necessary experience and knowledge to be a resource? When a problem arises, the board can play an important role in providing guidance and decision-making.

-Are board fees significantly lower than industry standards? While it is important to keep operating expenses down, excessively low board fees may indicate a lack of engagement by the board members.

While no two boards will have completely similar procedures and levels of involvement, as the role of hedge fund boards move closer to the standard set by independent fund boards in the US, hedge fund advisers will need to add this area to their list of compliance and management concerns. Having the board act as a rubber-stamp is no longer an option.

* Hedge funds advised by US-based investment advisers will generally only have a board of directors if they are domiciled outside the US. That is, it is rare to see a board of directors on a US fund; but a non-US fund (i.e., Cayman Islands) will always have a board of directors.